Allegiant Air May Revert to Its Roots and Sell More Vacation Packages

For most of its nearly 20-year history, Allegiant Air has wanted to be considered not as an airline, but as a travel company.

The airline —controlled by its parent, Allegiant Travel Co. — was a key piece of a company that sought to sell lucrative vacation packages to tourists. On Allegiant’s website, travelers from Grand Forks, North Dakota or Grand Island, Nebraska could book air, hotel rooms, rental cars and even attraction tickets for their once-per-year trip to Orlando.

They can still do that, and travelers cannot navigate Allegiant’s website without being inundated with offers. But over the past three or so years, as Allegiant has grown from 68 aircraft to 83, and added flights in larger cities, such as Memphis, Cincinnati and Austin, Texas, the company has pivoted away from selling so many vacation packages. On a per-passenger basis, Allegiant earns far less revenue from what it calls third-party revenue than it did a few years ago.

Now, however, Allegiant may revert to what worked so well previously. In September, the company hired former MGM Grand Resorts CEO John Redmond as its president.

Redmond, who had served on Allegiant Travel Co.’s board, had never worked for an airline. Given the complexities of the industry, carriers rarely hire senior executives without airline experience, but CEO Maury Gallagher suggested the company needed an outsider knowledgable about general tourism trends.

“When I asked him to join the board years ago, it was for that very reason having that hospitality background, the hotel, leisure, those types of things,” Gallagher said Oct. 26 on Allegiant’s third quarter earnings call. “Nothing against airline guys, but they don’t quite understand it nearly as well as John does and [he] will help us to go forward.”

High-margin business

In the third quarter, Allegiant said it made about $11.3 million in profit from sales of third-party products, an average of $3.88 per passenger. In the third quarter four years ago, when Allegiant was smaller, it turned a profit of roughly $9 million, or roughly $5.59 per passenger.

Sales of hotel rooms, rental cars and attraction tickets have high margins. In announcing this year’s third quarter earnings, Allegiant did not break down profits from its vacation package business, as in the past. But in the third quarter of 2012, Allegiant Travel earned its $9 million in profit on sales of just $28.3 million. That’s a much higher profit margin than any airline can earn flying passengers under typical market conditions.

In recent notes, investment analysts have generally cheered Redmond’s hire, saying it likely means Allegiant will take vacation packages more seriously.

“At minimum, [Redmond] is qualified to restore a key ancillary revenue cylinder for Allegiant,” Buckingham Research Group’s Daniel McKenzie said in a recent report. “As the former CEO of MGM Grand Resorts, Redmond makes a compelling case for how Allegiant could better monetize both existing and new hotel relationships.”

Over time, McKenzie said, Redmond’s expertise could produce major revenue.

“There are no initiatives to quantify today, but we’re comfortable the opportunities are likely in the tens of millions of dollars,”McKenzie said.

On Allegiant’s call, Redmond said he sees some potential for “low-hanging fruit” to improve margins, though he declined to share possible ideas. He said he may have more concrete details in about a month.

“It takes a little bit more time,” Redmond said. “There’s a multitude of issues we’re looking at there. [It is] probably a little bit premature at this point in time to definitively say whether or not they’re genuinely opportunities until we’ve had a further time to flesh them out.”